Trust & Estate Valuation - Complex Business Litigation

In Steinberg, the IRS challenged the legitimacy of a “net, net gift” transaction and also the use of the Section 7520 rate in this valuation. In the net gift agreement Mrs. Steinberg agreed to make gifts of properties to her daughters with a gross value of $109.4 million.  In exchange, the daughters agreed to assume and to pay any Federal gift tax liability imposed as a result of the gifts. The daughters also agreed to assume and to pay any Federal or State estate tax liability imposed under section 2035(b) as a result of the gifts in the event Mrs. Steinberg passed away within three years of the gifts.

The gift tax return filed reported a gift tax of $32 million by subtracting both of these liabilities in reporting net gifts of $71.6 million , after accounting for a reduction of the present value of the potential section 2035(b) estate tax liability of $5.8 million. The reported gift tax liability amounted to $32 million.

The IRS objected to the subtraction of the potential section 2035(b) estate tax liability and sent a notice of deficiency of $1.8 million.

The fundamental question posed by this case is the fair market value of the property rights transferred under the net gift agreement. The fair market value of transferred property must take into account any restrictions or conditions limiting the property’s marketability, including those imposed by the donor.

Because the estimated estate taxes is also a component used in calculating the net gift (and the net gift is the amount used to derive the estate taxes), we determined of the final amount of the contingent liability by performing complex interrelated calculations involving actuarial and present value factors through a series of iterations. 

The Tax Court accepted our valuation and methodology without change.